Forget emerging markets, frontier markets still rising

Opinion: How to make money investing in Vietnam or Nigeria

MatthewLynn

Nigeria still has lots of room to grow, and that’s why investors should look at the frontier markets as a substitute for the already-emerged markets like China, Turkey and Korea.

LONDON (MarketWatch) — Capital is heading home. Trade deficits are soaring. Reform has stalled. And the easy years of catch-up growth have come to an end.

There are no shortage of reasons why the markets have turned bearish on the emerging markets, and there are plenty of explanations for why they have been so badly hit at the start of 2014.

There is one thing that does not quite add up, however. While the emerging markets have been tumbling, the frontier markets have been doing as well as they ever did. They easily out-performed most other assets last year, and have carried on rising even as a wider crisis has rippled through the developing world.

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There are two possible explanations for that.

It might be that the markets have not gotten around to noticing them yet — and the frontier markets will get hammered soon enough. But it might also be something more interesting — which is that the frontier nations are now the real emerging markets. What we have termed the ‘emerging’ countries, after a decade or two of growth, are in fact fairly mature, middle-income economies.

What we think of as the distinguishing characteristics of the ‘emerging’ markets — very poor, but with the potential for rapid growth — can now be found in frontier markets such as Vietnam, Jordan or Nigeria.

The reality is that the terminology has got stuck behind the reality. The emerging markets are not emerging anymore. The frontier markets are.

No investor can have ignored the way the emerging markets have tumbled this year. A selloff that started at the end of 2013 accelerated through January.

From Turkey, to Argentina, to Russia and South Africa, stock markets tumbled. Emerging-markets currencies got hammered in January, and are now at their lowest level since 2009 after losing 15% in the past year. Overall, emerging-markets stocks were down by 6.6% in January, their worst start to a year since 2009. As markets fell, there was lots of discussion about how the growth of those countries had come to halt, and how the easy money created by quantitative easing had created a bubble, which was now about to be burst with predictably nasty consequences.

Not all the smaller, developing economies have been so badly hit however. The MSCI Frontier Markets index
136614, -0.27%
rose by 26% last year, while its Emerging Markets index
891800, +0.81%
fell by 3%. That has carried on this year. The S&P Frontier Index is up almost 2% so far this year —not spectacular, but not bad given that it is still only February, and these indexes are meant to be crashing.

The Dubai Index is one of the best-performing markets so far this year, along with its near neighbor Qatar. Vietnam is doing well, and so are some of the African countries.

There is a puzzle here. If the developing world was being hit by the Fed’s decision to wind down the amount of money it pumps into the system, or else by a slowdown in global growth, wouldn’t that hit all these markets equally? If anything, tiny markets like Dubai or Vietnam should be hit even worse by the hot money heading home than bigger ones such as Turkey.

In fact, the real problem is that many emerging markets are not really “emerging” anymore — at least not in any meaningful sense.

Take a look at some of the nations in that group (on MSCI’s definitions). China? Well, given how much debate there is about whether China or the U.S. is the most important economy in the world does it really make sense to describe it as “emerging” anymore? Not really.

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